CIO at wealth manager warns that investors relying on a repeat of 2019’s gains will be left disappointed
Last year was a banner year for investors but client conversations now focus on a level of discomfort and concern, according to a chief investment officer.
Greg Bainbridge, of Edmonton-based Raintree Wealth Management, reflected on the year just passed, pointing out a statistic in The Economist about how only 12 other years on record have beaten 2019 since 1928.
Bainbridge told WP there were myriad factors for this, with arguably the most significant being the complete reversal in the tone of the US Federal Reserve. While a lot of gains “popped” in January, the end of year featured market friendly developments like a potential resolution on trade and a clear direction on Brexit.
However, the CIO offered words of warning as 2020 kicks into gear: “The U.S. remains, in our view, a very expensive market from a valuation perspective. By historical standards, it is priced at a level we do not think will keep pace, certainly with what it did in 2019, and very likely not with what it's done on the long-term, historical basis.
“That may play out over 2020 or over the next three years. But investors relying on the types of returns we saw in 2019 are going to be left disappointed.”
Caution is, therefore, the watchword and the aforementioned worries have manifested themselves among clients, who Bainbridge said are feeling extreme market anxiety. Raintree’s strategy is one of defence right now and it’s resonating.
“That doesn't necessarily mean let's put the cash into the cushions,” Bainbridge said. “Our growth fund still returned double digits in 2019 but we think we accomplished that with a far lower risk level.”
Raintree’s Core+Explore approach remains fundamental to its ethos. The firm believes the traditional 60-40 portfolio mix leaves investors short when it comes to diversification and so espouses a strategy where the “Core” of a portfolio consists of securities that are more conservative, liquid, market-orientated and overseen by a registered money manager. This is then complemented by the “Explore” aspect, which is made up of forays into private markets that deliver diversification but also have the potential - albeit with more risk - to deliver outsized returns.
Last year, the company launched a real estate income fund that operates in the private markets, adding to its “Explore” portfolio. Bainbridge said the vehicle allows clients to get access to a broad array of different issuers in the private markets and, therefore, provides a more diversified base.
On the “Core” side, Raintree increased the duration in its fixed income portfolio given the change in direction and attitude of central banks. Bainbridge added: “We’ve also tightened up slightly in the defensive category of our portfolios. What I mean by that is we're using different strategies other than just straight, long-only equity to find sustainable areas of return.
“We use an absolute return strategy, which is a hedge-fund strategy and we have a tactical manager that's more opportunistic, [focused] on short-term plays, so there's a few things we're trying to do in order to reduce our reliance on long-only equity markets.”
Raintree finds it resonates with clients in the $500,000-to-$2 million range and view it as an underserved area of the market. While it has clients above and below that threshold, it aims to bring a fully discretionary managed portfolio to those with less than $2 million.
“It’s also really a philosophical fit that we're looking for with clients,” Bainbridge said. “Many want to be fully invested in the market and are willing to take the ups and downs as they come. We provide a different solution. We want a smoother return over time and really try to protect clients specifically from any large drawdown in the portfolio.
“Many of the PMs you see in Canada have that cut-off where you need a certain asset level. We view our role as bringing value to those clients below that because, frankly, we just think they’re underserved.”
